Hundred & Co have for several years now made their own spare parts for the video recorder that they service. At a trade fair recently, your technical director came across a potential supplier for the spares. The supplier offered to supply your spares for £78 each, based on a production level of 10,000 units per year. The relevant unit cost data from last year, when Hundred made 8,000 units were:

If Hundred & Co cease to make this component, all costs associated with it will disappear.
Inflation is running at 5% per year for materials, 6% per year for labour and all indirect costs, and 14.8% per year for general factory overheads. The rates of inflation are to be taken into account in arriving at the current manufacturing costs of the spare parts.
Additionally, if the spares are bought instead of manufactured, additional inspection and storage charges of £15,000 per year will be incurred, together with a further £4 per unit for carriage costs.
Required

(a) Determine the differential costs of whether to continue making or to buy in the spare parts.

(b) Advise Hundred’s management on the course of action it should take relating to the production of the spare parts.

Transcribed Image Text:

Direct materials Direct labour Indirect materials and labour General factory overheads 47.00 17.00 6.50 5.00